, 35 tweets, 15 min read Read on Twitter
1/The 2 final @Bachelor_X debates were on “Are Economic Agents Rational?”

so here’s a thread on how economists have defined rationality across 20th century.

Focus is on 2 debates: status of expected utility theory (EUT) in 50s & of Kahneman & Tversky’s results in 70s to 90s
2/ Narrative arch (oversimplified, b/c, well, twitter) is that of a descriptive behavioral hypothesis (rationality as utility maximization) turned formal & normative as econs seek to emancipate from ties w/ psychology after 1930s, but psychology strikes back from 1970s onward
3/In late 19th century, marginalists pictured rational man as selfish agent evaluating utility at the margin. The ‘law’ of decreasing marg U had psychological underpinnings, as Fechner-Weber law showed that a geometric growth in stimulus resulted in arithmetic growth in sensation
4/Brits like Jevons & Edgeworth defined U as homogenous measure of felt pleasures & pains, which they hoped could be measured w/ hedonometer.

But psychology moved away from hope to measure sensations into science of observing behavior & interaction w/ environment: behaviorism
5/ Econ too wanted 'observables', parting from psy in process. Hicks & Allen focused on behavior output, aka baskets of goods indifferent for individuals.

Though a long cardinal U tradition remain, ordinal U as a representation rather than a guide for behavior gained traction
6/Keynes,Hayek,Knight loathed formalist move, but Samuelson wanted to go further in stripping rationality of psy undertones jstor.org/stable/2548836. Came up w/ Weak Axiom of Revealed Prefs, whereby econ infers preferences from consistent observed chosen bundle given prices/budget
7/ While Samuelson later backtracked, redefinition of rationality as choice consistency furthered by Von Neumann & Morgenstern’s axiomatization of decision under risk: if 4 axioms satisfied, then U function exists such that gamble is chosen over other if its expected U is higher
8/ Savage proposed Bayesian rendition of EUT, whereby a unique subjective probability function was inferred from gambling behavior. He then worked on risk aversion w/ Friedman (home.uchicago.edu/~vlima/courses… ) who believed EUT was descriptively good enough (see quote below)
9/ But Samuelson found independence of irrelevant alternatives axiom implausible. Long tetter exchanges ensued (see detailed story by @gaddus2016 aeaweb.org/articles?id=10… ). Friedman/Savage argued counterexemples proved EUT is non-tautological. Samuelson hilariously underwhelmed
10/ So Savage explained independence axiom was special case of a “sure-thing principle” whereby agent *should *not take event uncertainty into account if occurrence of said event doesn’t affect decision, aka EUT is good *normative* theory of rational decision ( Marschak agreed)
11/Savage convinced Samuelson (). Quickly appeared defense of EUT as normative was only way to resist 1952 assault by sneaky Allais, who tricked them into violating independence axiom by choosing a & d in Paris. Ellsberg then highighted ambiguity aversion
12/for histories of rationality as utility maximization, then ordering consistency
See book by @gaddus2016, work by Lenfant (hal.archives-ouvertes.fr/hal-01771855/d…) on ordinal vs cardinal U, Herfeld (catherineherfeld.weebly.com/publications.h…) & @ngiocoli
(e-elgar.com/shop/modeling-… on history of decision theory)
13/ for histories of the Allais paradox and the 1952 Colloque du risque, see Mongin papers.ssrn.com/sol3/papers.cf… & Heukelom ncbi.nlm.nih.gov/pubmed/25833801
14/ Not all econs agreed to ditch psych & endorse EUT as normative benchmark for rationality, however. In 1950s, interdisciplinary social scientists at Carnegie tapped shift in psychology: cognitive revolution, new focus on ‘mind,’ analogy between human & machine problem solving
15/ Someone working at intersection of computer sci, AI with Newell (he got Turing award), servomechanism, info processing, psychology & econ (he got a Nobel) was Herbert Simon. His autobiography (mitpress.mit.edu/books/models-m…) & Augier’s bio ( philpapers.org/rec/AUGMOH ) worth a read
16/ Simon found gathering info costly, human computational abilities limited & loyalty, authority, values important, rationality was bounded. Proposed to replace EUT w/ satisficing cognitive heuristics, whereby agents within firms select first option that meets aspiration level
17/ Neither his, nor colleagues Cyert & March’s challenge to profit max, nor Katona’s challenge to consumer rationality , attitude research & development of surveys at Michigan managed to challenge core status of EUT. 1st found home in organization theory, 2nd in marketing
18/ Question of how to define rationality in econ and whether to change those definitions, or consider that agents behave irrationally, or else consider the definition normative when confronted with conflicting empirical evidence resurfaced in 1980s, with Kahneman & Tversky
19/ in 1969, young psychologists Tversky (who studied mathematical normative rules for behavior & theory of measurement) & Kahneman (who ran experiments to identify cognitive errors) polled colleagues at APA, found systematic over-estimation of probability of being right
20/ Their experiments showed that shortcuts in reasoning & biases (anchoring, base rate fallacy, confirmation bias, etc), framing effects and preference reversal were pervasive, aka phrasing, structure, context, timing of decision problem affect choices made
21/ insights were formalized in prospect theory emphasizing importance of reference point & idea that disutility of loss > utility of gain its.caltech.edu/~camerer/Ec101…
For history of K&T collaboration, see Heukelom's work researchgate.net/publication/23… … and cambridge.org/core/books/beh…
22/ what happened exactly in 1980s to 2000s is not yet clear to me. There’s no agreement in flourishing literature on BE history on why they succeeded in colonizing mainstream econ from another discipline while Simon & co haven’t. Mix of intellectual & institutional strategies:
23/ In her early account of shift from old to new BE, E. Sent (researchgate.net/publication/31… ) argues 1970s mathematical difficulties (Sonnenschein-Mantel-Debreu, folk theorem, no-trade theorems) created space for psychological insights
24/ Works by young epistemologists (Truc philpapers.org/rec/TRUINB, Jullien drive.google.com/file/d/10OTEFd… & several others) point to K&T's willingness to preserve core mainstream assumptions instead of replacing them. ≠ in approaches seen in debate w/ Gigerenzer psycnet.apa.org/record/1996-01…
25/ Debate was multi-layered : Gigerenzer is frequentist, thus thought K&T’s single-case experiments aimed at testing “intuitive statistician” in agents is nonsense, that agents are not irrational & “rationality” needs redefinition to be consistent w/ ‘fast frugal heuristics' ...
26/… agents use to make decisions efficiently. K&T heralded Bayesian decision making as normative decision theory (aka how agent should behave if they were perfectly rational). The experiments they set-up were thus meant to study single-event probability inference
27/ Experiments show systematic deviations from norms. K&T’s heuristics are ways for non-sophisticated decision-makers to approximate optimum. If I understand correctly (which i'm not sure), then, behavioral econ therefore preserved core mainstream assumptions (as normative)
28/Psych-born BE thus embedded in ≠ traditions. Heukelom details institutional strategy for entrenchment in econ, key role played by Wanner’s Russell Sage foundation & BE program meant to settle divisions w/ experimentalists (Smith found them consistent w/ rational behavior)
29/A. Truc’s massive scientometric study philpapers.org/rec/TRUINB documents ≠ institutionalization strategies across disciplines: For Kahneman, rise of econ pubs was initially slow, becomes major target after 1987 alongside psych. Kahneman is ‘disciplinary mobile’ researcher
30/ By contrast, Thaler targeted econ & consumer behavior directly (JEP ‘anomalies’ series), doesn’t move toward psych with time. Next BE gen targeted various sciences (neurosci, behavioral science, philo, socio, anthro) through application to health, env, education.
31/Then Rabin focused on integrating psych insights into ‘normal’ econ models, Fehr, Laibson & @CFCamerer on developing new behavioral assumptions as bridge b/w disciplines & developed outward coauthorships. Successful institutionalization seen in Rabin/Schleifer Clark medals…
32/... Kahneman & Thaler nobels, rise of behavioral finance & game theory, establishment of nudge units in UK/US policy spheres.

I nevertheless wonder when move from separate econ space to workhorse models in micro/macro happened (only now? which key paper signals integration?)
33/ Of course all this is hugely simplified. There were various debates on various aspects of rationality: consistency, calculation, time, willpower, altruism. Difficult relationships w/ experimental econ also important. & I'm not sure which interpretation of BE to retain

Truc's scientometric analysis of behavioral economics can be accessed here academia.edu/38358897/The_D…
34/ Link I provided in tweets 29-31 is not the right one.

Scientometric analysis of behavioral economics is from "The Disciplinary Mobility of Core Behavioral Economists" by Alexandre Truc, which you can read here


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